Why the Xero (ASX:XRO) share price can go even higher from here

The Xero Limited (ASX:XRO) share price could be heading higher from here according to one leading broker. Here’s what you need to know…

| More on:
A broker caluculates a hold rating for an asx share price

Imahge source: Getty Images

The Xero Limited (ASX: XRO) share price is pushing higher on Monday morning.

At the time of writing, the cloud-based business and accounting platform provider’s shares are up 1% to $140.49.

This means the Xero share price is now up 78% over the last 12 months.

Can the Xero share price go higher?

One broker that believes the Xero share price can still go higher from here is Goldman Sachs.

This morning the broker retained its buy rating but trimmed its price target slightly to $153.00.

Based on the current Xero share price, this implies potential upside of 9%.

What did Goldman say?

Goldman Sachs has been looking into Xero’s recent acquisition of both Planday and Tickstar.

The broker views both acquisitions as positive and expects them to accelerate Xero’s platform strategy through the broadening of its product offering into workforce management.

In addition, it notes that they provide a platform for Xero to launch its core accounting product in Scandinavia, which its sees as an attractive potential market.

Goldman Sachs estimates that there is a total addressable market (TAM) of 2.2 million subscribers for its accounting software in the region.

The broker also feels that the region has favourable market characteristics. These include limited competition, high GDP/capita supporting pricing power, high digitisation, VAT compliance, and supportive E-invoicing regulations.

What else did Goldman say?

In addition to the acquisitions, Goldman has been looking into industry data to see how Xero has been performing. Positively, it believes Xero’s strong form has continued.

Goldman said: “We consider recent data points, which are collectively tracking well. These include: (1) Accounting partner numbers continue to grow strongly, with annualized growth of c.20% in key markets, while the announced BDO partnership (5th biggest practice globally, offices in 171 countries) is a meaningful positive; (2) the number of apps in the ecosystem continues to increase, growing at an annualized rate of 25-32% p.a. across AU/UK/US; (3) XRO/QBO pricing has increased, while Freshbooks launched in AU; (4) Google trends data for XRO is mixed, performing well in AU/UK but lagging in the US.”

Why has the broker reduced its price target?

Despite the many positives listed above, readers may have noted that Goldman’s target on the Xero share price has been reduced.

It explained that this was due largely to a reduction in US software as a service (SaaS) peer multiples, impacting its valuation.

It explained: “We revise our FY21-FY23 EBITDA by +2-7% (-1 to +1% constant currency) driven by (1) the inclusion of Planday/Tickstar; (2) Accelerated Scandinavia rollout, and (3) AUD FX upgrades. Our 12mf TP decreases by -3% to A$153/share, with the earnings upgrades offset by lower US SaaS peer multiples (2x reduction to 27X) updated spot A$/NZ$ (1.08, from 1.05) and increased share base.”

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Broker Notes